Whatever you do, just do it from the start, don't be a sole proprietor "until you decide". If you start out as a sole prop then change your status you'll have to reapply for sales tax numbers, FEIN numbers, etc. It's just easier to do it from the beginning.
In my opinion an LLC is a must, along with liability insurance, if only because of food allergies. One lawsuit can wipe out a lot of your personal assets, even if you win. It probably won't happen, but it's important to be protected just in case.
When you form an LLC you can structure it so it's taxed as an S-Corp if you wish.
Thanks,
Jason Kraft
Let Them Eat Cake, The Allergy-Friendly Patisserie LLC
http://www.allergyfriendlypastries.com
We have a business, not cake related. We are a S corp. When trying to decide between the LLC and the S corp our lawyer said that if there is ever an audit, or any other legal matter S corps carry more weight than a LLC.
There are certain restrictions on company shares, setting up the corporation and dividing the profit in a S corp. So I STRONGLY suggest you get a lawyer and pick their brain. If you are serious about any kind of company, this should be your first step. I have businesses that I have set up by myself and this one that we set up with a lawyer and an accountant. And by far this business is set up with a solid foundation as far as the legal and accounting aspects of the business are concerned. We are much more comfortable with this structure than what we have done in the past. It especially helps to have the accountant when it comes to buying and depreciating our equipment. I would think this would more important for a cake business seeing how you use mixers, ovens, etc. that need to be replaced a lot sooner than our Macs. Luckily for me so far my only expense has been a computer....and time. But still our accuontant helped us to set up the depreciation on the computer the best way we could to be able to get a deduction on our taxes. HTH
Leah and Linda, have you heard anything about how financial reform will affect S-corp tax rules? I'm no accountant, but I seem to recall that new rules will only affect if you make over $xxx,xxx per annum.
No I haven't. We have not made enough money to worry about the amount. Like I said it is a side business, a very side business right now.
But we are thinking of changing course. We are going to reevaluate things after this vacation. We lost our developer to law school (my son actually). We are trying to figure out who is going to take over the job if anybody, seeing how it was way more hours than it was worth to develop the software for the very little ROI we are receiving. But I'll throw that question to my DH. He is meeting with our accountant next week.
The sole proprietorship (with or without registering a DBA)/LLC/S Corp/C Corp question is both simple and complex. I am a lawyer and know something about this, but provide these comments only as general information and not intending them to be legal advice. And yes, I have to make that disclaimer.
There are essentially two perspectives from which to look at the business undertaking: the way the public and third parties (clients, suppliers and others with whom the business will have contracts) look at it, and the way the I.R.S. and other taxing authorities look at it.
As to how the public looks at it, this is significant in issues of liability. For example, a customer sues the business, or the business goes belly up and breaks a lease on a kitchen. The main benefit of an LLC, corporation, or any entity besides a sole proprietorship is limited liability. That means that personal assets will not be subject to claims against the company. But it doesn't always work that way. There are formalities with each kind of entity that need to be followed in order to preserve the limited liability protection. The great appeal of LLCs is that there is less formality required in terms of the paperwork (for example, you don't issue stock or have to maintain a corporate book), which especially in the case of a one-person corporation, always seems a bit absurd to the shareholder. At any rate, remember that limited liability does not always exist; you can do things, organize things, or neglect to do things in a way that will still leave you personally liable for business debts.
LLCs are relatively new (last 15-20 years or so) inventions, and for quite a while lawyers cautioned clients to stick with an S or C corporation because there was precedent developed for those "more formal" entities. The law governing liability in LLC situations was not well settled, so we were cautious to advise clients particularly in a high-risk business to choose anything but the known safety net of a corporate organization. Times have changed, precedent has been established, and in most cases, LLCs are a fine choice for a business that wants the limited liability and will observe LLC requirements.
As to how the taxing authorities look at it, a sole proprietorship, partnership, LLC, or corporation can all be considered a "business" by the IRS. A business must maintain certain formalities and "business practices" in order for the I.R.S. to consider an undertaking to be a business rather than a hobby. Profitability is one of the things that can help prove an undertaking is a business and even provide a presumption that it is.
I am skeptical of the claim of an S corporation (or a C corporation) being better on an audit. The difference may be, however, that the "owner" of a corporation is more motivated to observe corporate formalities and "do the right things" with respect to business formalities, and thus would be more on the ball where the IRS is concerned.
There are some benefits that LLCs and corporations have under the tax code that sole proprietorships do not. For example, they may be able to deduct all of the health care premiums paid for employees.
Quote by @%username% on %date%
%body%